UBS Economics-US Economic Perspectives _Chair Powell hesitant signal_ Pin...-117418960

ab22 August 2025Global ResearchUS Economic PerspectivesChair Powell: hesitant signalChair Powell said risks may warrant adjusting policyChair Powell opened his speech saying the balance of risks to monetary policy may be shifting, and concluded that the shifting balance of risks may warrant adjusting the stance of monetary policy, presumably lower. However, as has been the case for the last two FOMC meetings and press conferences, Chair Powell has been hesitant to signal much of anything to come. Today, he did not rule out a September rate cut, nor did he commit to one. We did not expect either. He simply leaned into the option to do so, and remained data dependent."Putting the pieces together, what are the implications for monetary policy? In the near term, risks to inflation are tilted to the upside, and risks to employment to the downside—a challenging situation. When our goals are in tension like this, our framework calls for us to balance both sides of our dual mandate. Our policy rate is now 100 basis points closer to neutral than it was a year ago, and the stability of the unemployment rate and other labor market measures allows us to proceed carefully as we consider changes to our policy stance. Nonetheless, with policy in restrictive territory, the baseline outlook and the shifting balance of risks may warrant adjusting our policy stance." - Chair Powell, August 22, 2025On the labor side of the mandate, Chair Powell clearly believes the labor market risks are more prevalent than previously. "Overall, while the labor market appears to be in balance, it is a curious kind of balance that results from a marked slowing in both the supply of and demand for workers. This unusual situation suggests that downside risks to employment are rising. And if those risks materialize, they can do so quickly in the form of sharply higher layoffs and rising unemployment." It is not clear in his speech whether the inflation risks have risen, but it does not appear so. While acknowledging the inflation risks are to the upside and may continue for longer than currently forecast, Chair Powell was fairly clear that the most likely case is that the inflation pick-up will not be permanent. The language on tariff related inflation was pretty similar to the last two post FOMC meeting press conferences. "A reasonable base case is that the effects will be relatively short lived—a one-time shift in the price level. Of course, "one-time" does not mean "all at once." It will continue to take time for tariff increases to work their way through supply chains and distribution networks. Moreover, tariff rates continue to evolve, potentially prolonging the adjustment process." That suggests a certain tolerance for tariff related inflation, consistent with the June Summary of Economic Projections."It is also possible, however, that the upward pressure on prices from tariffs could spur a more lasting inflation dynamic, and that is a risk to be assessed and managed. One possib